Financial Markets and institutions Assignment Example | Topics and Well Written Essays - 2000 words

Financial Markets and institutions - Assignment Example March 16 saw an even worse situation in which economic data of the US painted a dismal outlook for the economy. Whole sales prices were seen increasing more than expected, while a lower than expected demand in the housing sector pushed the investors over the edge and panic selling took place. Investors sought sanctuary in US Treasuries instead of the stocks. Another key factor that lowered the stock index was the fact that option prices jumped up by 21% given the situation in Japan. However, the index saved grace and climbed up by almost 2.2% in the following two days, owing to the fact that G& offered their assistance in helping to control the Japanese fiasco. At the same time, the US manufacturing sector registered steady growth figures which boosted the S&P index. Another key factor was that investors displayed a slightly higher risk appetite and this saw Treasuries going down as yields rose to 3.26% from 3.19%. The most primary determinant of any index is the economic outlook of the region. S&P was highly influenced by the economic data that was coming forth. The disaster in Japan nudged the fact that US imports from the region would suffer. This could cause production issues in the US, which depended on machinery and raw material from Japan. Furthermore, the economic indicators such as inflationary pressure and weak demand elucidated the fact that the GDP growth would slow down. These assumptions triggered the rise in US treasuries which were seen as a safe haven. Oil prices not only raised the energy costs in US, but also created a sense of dread in OMCs’ who were at risk of supply shocks. Investors offloaded these stocks, judging that the P/E measures would drop due to lower earning concerns. Present valuation of future cash flows, or rather the ability to generate future cash flows was the major determinant in the decline and the rise in the market during this week. As mentioned above, the rise in manufacturing growth suggested that the sector wo uld show positive returns, hence the market jumped up. International support for the Japanese boosted sentiments that their production capacity would soon normalize. Investors took this as a positive sign and the S&P 500 gained ground on this. The economic theory apart from present value of cash flows which applies to the S&P’s fluctuation is the inflation development. If inflation persists, then monetary tightening could occur. Any hike in interest rates would hurt economic growth, and such sentiments can cause a decline in the indices. As mentioned earlier, the biggest determinant of price movements of stock indices are the economic indicators and expectations of these indicators. If expectations lead to believe that there will be a positive change, then the prices of these indices will jump up. The flip side of the coin is that if sentiments perceive the market factors to be unfavorable, then a downward spiral can ensue. Financial Crisis 2008-11 Introduction The global fin ancial crisis which started in early 2007 has proven to be perhaps the great financial catastrophe in history. Although it traces its roots back to the starting of the millennia, the subsequent meltdown was most gruesome over the past 3 years. What began as a crisis of the sub-prime mortgage market in the United States quickly transcended national borders and developed into an